a

GAO

United States General Accounting Office

Report to the Chairman, Subcommittee 

on Housing and Transportation, 

Committee on Banking, Housing and 

Urban Affairs, U.S. Senate

January 2004 SINGLE-FAMILY 

HOUSING

Cost, Benefit, and 

Compliance Issues 

Raise Questions about 

HUD’s Discount Sales 

Program

GAO-04-208
www.gao.gov/cgi-bin/getrpt?GAO-04-208.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact David G. Wood 

at (202) 512-8678 or woodd@gao.gov. 

Highlights of GAO-04-208, a report to the 

Chairman, Subcommittee on Housing and 

Transportation, Committee on Banking, 

Housing and Urban Affairs, U.S. Senate 

January 2004

SINGLE-FAMILY HOUSING 

Cost, Benefit, and Compliance Issues 

Raise Questions about HUD's Discount 

Sales Program 

GAO found that the Discount Sales Program poses significant costs to HUD, is of 

questionable benefit to homebuyers, and has serious monitoring and compliance 

problems. GAO estimates that the program cost HUD between $18.8 and $23.9 

million in calendar year 2002. Between $15.1 and $20.2 million was a reduction 

in net revenue resulting from HUD’s selling approximately 1,200 properties 

through the program instead of through its regular sales process. Personnel 

expenses for administering the program accounted for the remaining $3.7 

million. GAO’s analysis of 238 properties sold under the program in 2002 

suggests that most of the homebuyers did not benefit financially. Assuming that 

nonprofits and homebuyers would incur the same rehabilitation costs, GAO 

estimates that 76 percent of the homebuyers would have spent less purchasing 

the properties through HUD’s regular process and paying for the rehabilitation 

work themselves. And while the program can help homebuyers access a range 

of homeownership services, these services are also available from other sources. 

GAO did not evaluate the extent to which the program generated other benefits, 

such as neighborhood revitalization. 

While uncovering numerous program violations, HUD’s monitoring efforts have 

faced challenges. For example, HUD monitors nonprofits through desk reviews 

of the annual reports it requires nonprofits to submit each February. However, 

as of July 2003, HUD’s four homeownership centers, which administer the 

program, had not received reports for more than half of the properties the 

agency estimates were purchased and resold under the program in 2002. Even 

with this problem, the desk reviews found that 28 of the 44 nonprofits that 

submitted reports violated resale limits, earning an estimated total of $704,720 in 

excess profits (see figure). HUD requires that nonprofits use their excess profits 

to pay down the mortgages of the homebuyers they overcharged, but the 

agency’s ability to enforce this requirement is extremely limited. As of July 2003, 

nonprofits had made only $62,000 in payments on mortgages. 

Resale Price Violations on Discounted Properties Sold in Calendar Year 2002 

Atlanta

Denver

Philadelphia

Santa Ana

Nonprofits with

resale price violations 

out of all that reported

Homeownership

center

Properties with

resale price violations 

out of all properties reviewed

Total

estimated

excess profits

$123,059

$253,926

$186,942

$140,793

9 12

12 17

27 58

3 6

4 9

34 93

Total 44 124 265 $704,720

18 37

45 77

Denotes number of nonprofits or properties with violations out of total.

Source: HUD.

28

In 2001, the Department of Housing 

and Urban Development’s (HUD) 

Inspector General reported on 

serious problems in HUD’s 

Discount Sales Program, under 

which nonprofit organizations 

purchase HUD-owned properties at 

a discount, rehabilitate them, and 

resell them to low- and moderateincome homebuyers. The 

objectives of the program are to 

expand affordable housing 

opportunities, help revitalize 

neighborhoods, and reduce HUD’s 

property inventory in a timely, 

efficient, and cost-effective 

manner. Although the Inspector 

General recommended that the 

agency suspend the program and 

evaluate its viability, HUD did 

neither. GAO was asked to assess 

(1) the costs of the program to 

HUD, (2) the benefits of the 

program to homebuyers, and (3) 

HUD’s efforts to monitor 

participating nonprofits and 

enforce program requirements. 

GAO recommends that HUD (1) 

evaluate options to improve the 

program’s benefit to homebuyers, 

the agency’s monitoring of 

nonprofits, and enforcement of 

excess profits requirements; (2) 

assess the extent to which the 

program is meeting its objectives; 

and (3) terminate the program if its 

current cost plus the resources 

needed to improve it exceed the 

program’s benefits. HUD agreed 

with GAO’s recommendations to 

evaluate the program but said that 

the report overstated the program’s

costs and understated its benefits.
Page i GAO-04-208 Single-Family Housing

Contents

Letter 1

Results in Brief 2

Background 4

In 2002, the Discount Sales Program Cost HUD at Least

$18.8 Million 8

The Discount Sales Program Is Not Likely to Benefit Most 

Homebuyers Financially but Can Help Them Access 

Homeownership Services and Assistance 14

Limited Monitoring Efforts Have Uncovered Numerous Violations, 

but Effective Enforcement Has Been Difficult 19

Conclusions 26

Recommendations for Executive Action 27

Agency Comments and Our Evaluation 28

Appendixes

Appendix I: Objectives, Scope, and Methodology 31

Appendix II: Statistical Models Used to Estimate Program Costs and 

Benefits 34

Appendix III: Comments From the Department of Housing and Urban 

Development 44

Appendix IV: GAO Contacts and Staff Acknowledgments 46

GAO Contacts 46

Acknowledgments 46

Tables Table 1: HUD’s Calendar Year 2002 Single-Family Property Sales 5

Table 2: Estimated Reduction in Net Revenue Due to the Discount 

Sales Program in Calendar Year 2002, by Discount Level 11

Table 3: Estimated Reduction in Net Revenue Due to the Discount 

Sales Program in Calendar Year 2002, by Homeownership 

Center 12

Table 4: HUD’s Estimate of Personnel Costs for the Discount Sales 

Program in Calendar Year 2002, by Homeownership 

Center 13

Table 5: Estimated Number of Homebuyers Who Did and Did Not 

Benefit Financially by Purchasing Homes through HUD’s 

Discount Sales Program 16

Table 6: Percentage of Estimated Excess Profits Used to Pay Down 

Homebuyer Mortgages, as of July 2003 26
Contents

Page ii GAO-04-208 Single-Family Housing

Table 7: Variable Names, Descriptions, and Mean Values 39

Table 8: Coefficients from Estimated Models 40

Figure Figure 1: Resale Price Violations Disclosed by Desk Reviews of 

Nonprofits’ Annual Reports on Calendar Year 2002 

Program Activity 23

Abbreviations

FHA Federal Housing Administration

GAO General Accounting Office

HOC homeownership center

HUD Department of Housing and Urban Development

SAMS Single-Family Acquired Asset Management System

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Page 1 GAO-04-208 Single-Family Housing

United States General Accounting Office

Washington, D.C. 20548

A

January 30, 2004 Letr

The Honorable Wayne Allard

Chairman

Subcommittee on Housing and Transportation

Committee on Banking, Housing and Urban Affairs

United States Senate

Dear Mr. Chairman:

Each year, the Department of Housing and Urban Development (HUD) 

acquires tens of thousands of single-family properties through foreclosures 

when homeowners default on mortgages insured by the Federal Housing 

Administration (FHA). HUD sells these properties in as-is condition 

through its regular sales process and a number of smaller, specialized 

programs, including the Discount Sales Program. Under the Discount Sales 

Program, HUD sells properties at 10, 15, or 30 percent discounts to 

nonprofit organizations1

 and government entities2 (nonprofits) that then 

rehabilitate (rehab) the homes as necessary and resell them to low- and 

moderate-income homebuyers. However, a November 2001 report by 

HUD’s Inspector General concluded that low- and moderate-income 

homebuyers did not benefit significantly from the program; that many 

participating nonprofits were actually profit-motivated entities; and that 

HUD lacked effective approval, monitoring, and enforcement procedures.3

 

In light of these problems, the Inspector General recommended, among 

other things, that the agency suspend the program and evaluate the 

program’s viability. Although HUD acted on many of the report’s 

recommendations, it neither suspended nor evaluated the program. 

1

HUD requires these organizations to have 501(c)(3) status. Section 501(c)(3) of the Internal 

Revenue Code covers charitable organizations that are eligible to receive tax-deductible 

contributions. Such organizations must not be organized or operated for the benefit of 

private interests, and no part of their net earnings may benefit any private shareholder or 

individual.

2

Government entities include states, counties, cities, or other units of government such as 

public housing authorities. For purposes of this report, the term “nonprofit” includes 

nonprofit organizations and government entities.

3

U.S. Department of Housing and Urban Development, Office of Inspector General, 

Nonprofit Participation in HUD Single-Family Programs, 2002-SF-0001 (Washington, 

D.C.: November 5, 2001). The audit covered the discounted properties HUD sold between 

January 1, 1998, and April 30, 2001.
Page 2 GAO-04-208 Single-Family Housing

As agreed with your office, this report assesses (1) the cost of the program 

to HUD, (2) the benefits of the program to homebuyers, and (3) HUD’s 

efforts to monitor participating nonprofits and enforce program 

requirements. To address these objectives, we reviewed the program 

activities of HUD’s Office of Housing and four homeownership centers 

(HOC) in Atlanta, Georgia; Denver, Colorado, Philadelphia, Pennsylvania; 

and Santa Ana, California. As agreed with your office, our work focused on 

the properties HUD sold through the program in calendar year 2002 and the 

monitoring and enforcement activities the HOCs performed in connection 

with those properties. To estimate the program’s cost to HUD and its 

benefits to homebuyers, we performed a statistical analysis using data from 

HUD’s Single-Family Acquired Asset Management System (SAMS)4

 and the 

U.S. Census Bureau. We did not evaluate the extent to which the program 

generated other benefits, such as neighborhood revitalization. Appendixes 

II and III provide detailed information on our objectives, scope, and 

methodology.

Results in Brief We estimate that the Discount Sales Program cost HUD between $18.8 and 

$23.9 million in calendar year 2002. Most of this cost, between $15.1 and 

$20.2 million, was a reduction in net revenue resulting from HUD’s selling 

approximately 1,200 properties through the program rather than through 

its regular sales process, in which properties’ prices are not discounted. 

The reduction in net revenue varied according to the discount level, with 

properties sold at a 30 percent discount accounting for the largest share of 

the total reductions. Personnel expenses for administering the program 

accounted for the remainder of HUD’s cost. HUD estimates that its 

headquarters and HOCs allotted about 45 staff years5

 to the program in 

calendar year 2002, primarily to oversee participating nonprofit 

organizations. According to HUD, these staff years equated to 

approximately $3.7 million in personnel costs. HUD officials said that in the 

absence of the Discount Sales Program, these staff years would be 

allocated to other activities. 

4

SAMS contains information on the properties acquired and sold by HUD.

5

We use the term “staff year” to mean the amount of time a full-time employee would work 

in the course of 1 year.
Page 3 GAO-04-208 Single-Family Housing

Our analysis of 238 homes sold under the Discount Sales Program in 

calendar 2002 indicates it is likely that most of the homebuyers did not 

benefit financially from the program.6

 Specifically, assuming that 

nonprofits and homebuyers would incur the same costs to rehab a 

property, we estimate that 76 percent of the homebuyers would have spent 

less if they had purchased the properties through HUD’s regular sales 

process and paid for the rehab work themselves. The estimated proportion 

of homebuyers who did not benefit varied by discount level, ranging from 

more than 90 percent at the 15 percent discount level to one-half at the 30 

percent discount level. In part, homebuyers did not benefit because some 

nonprofits overcharged for some properties and some program rules 

authorize nonprofits to pass on costs—such as financing as closing costs--

that homebuyers would likely not incur under HUD’s regular sales process. 

We also found that while the program can provide access to a range of 

services and assistance that may benefit homebuyers, such as 

homeownership counseling, home maintenance courses, and down 

payment assistance, these services are also available from other sources. 

HUD has stated that the program generates benefits and supports policy 

goals, such as neighborhood revitalization and stability, that extend beyond 

benefits to individual homebuyers, but the agency has not studied the 

extent to which the program is serving these ends.

HUD’s monitoring efforts have uncovered numerous program violations, 

but implementing the monitoring process and effectively enforcing 

program rules have been difficult. For example, one of the HOCs’ primary 

monitoring tools is the desk review of the annual reports participating 

nonprofits are required to submit each February. However, as of July 2003 

the centers had not received annual reports from nonprofits responsible for 

more than half of the 626 discounted properties that HUD estimates were 

purchased, rehabbed, and resold under the program during calendar year 

2002. Further, as a condition of program participation, nonprofits must 

allow HUD staff to perform on-site reviews of their operations. However, 

the HOCs’ use of these on-site reviews has been uneven. The Atlanta and 

Denver centers reviewed about half of their approved nonprofits in 

calendar year 2002, but the Philadelphia and Santa Ana centers reviewed 

few and none, respectively, citing limited staff resources and the difficulty 

of traveling to nonprofits’ offices. But even with these limitations, the 

6

These were the only properties for which HUD could provide the rehab costs and selling 

prices to homebuyers as of July 2003. HUD estimates that 626 properties were purchased 

and resold under the program in calendar year 2002.
Page 4 GAO-04-208 Single-Family Housing

HOCs’ desk and on-site reviews identified numerous violations of program 

requirements. For example, the centers’ desk reviews found that nonprofits 

often did not comply with HUD limits on the resale price of discounted 

properties and earned excess profits from the program. Specifically, the 

reviews showed that 28 of the 44 nonprofits that submitted annual reports 

sold one or more properties at prices exceeding those allowed under the 

program, resulting in 124 homebuyers being overcharged an estimated total 

of $704,720. However, the centers have had limited success enforcing the 

requirement that nonprofits making excess profits pay down the mortgages 

of homebuyers they overcharged. As of July 2003, nonprofits had used less 

than 10 percent of the estimated excess profits they made to pay down 

homebuyers’ mortgages.

This report recommends that the Secretary of HUD (1) evaluate options to 

improve the program’s benefit to homebuyers, the agency’s monitoring of 

nonprofits, and enforcement of excess profits requirements; (2) assess the 

extent to which the program is meeting its objectives; and (3) terminate the 

program if its current cost plus the resources needed to improve it exceed 

the program’s benefits. In comments on a draft of the report, HUD agreed 

with our recommendations to further assess the program but added that 

our analysis appeared to overstate the program’s cost and understate its 

benefits.

Background Established in 1993, HUD’s Discount Sales Program seeks to expand 

affordable housing opportunities, help revitalize neighborhoods, and 

reduce the agency’s inventory of single-family properties in a timely, 

efficient, and cost-effective manner.7

 Under the program, approved 

nonprofit organizations receive a discount when purchasing HUD-owned 

single-family properties and are required to rehabilitate and resell them to 

low- or moderate-income homebuyers. As of August 2003, 423 nonprofits 

were approved to participate in the program, down from more than 2,000 

nonprofits 3 years earlier. HUD attributed the reduction to changes in the 

program, such as stricter approval standards and increased reporting 

requirements, and to the agency’s efforts to remove nonprofits that violate 

program rules.

7

HUD has broad authority to dispose of single-family properties in its inventory. See 12 

U.S.C. 1710(g).
Page 5 GAO-04-208 Single-Family Housing

HUD acquires properties through foreclosures of homes with FHA-insured 

mortgages. FHA provides federally backed mortgage insurance primarily to 

low-income and first-time homebuyers who might otherwise have difficulty 

obtaining a mortgage.8

 In calendar year 2002, HUD acquired more than 

67,000 properties through foreclosures and sold approximately 65,000 

properties from its inventory. At the end of calendar year 2002, HUD had an 

inventory of 32,018 single-family properties. 

HUD sells the properties in its inventory in as-is condition through a 

number of different programs. Table 1 shows the primary programs HUD 

uses to sell properties and the number of properties sold under each during 

calendar year 2002. Most HUD-owned properties are eligible for price 

reductions under the Discount Sales Program. The program accounted for 

approximately 2 percent of HUD’s overall property sales in calendar year 

2002. 

Table 1: HUD’s Calendar Year 2002 Single-Family Property Sales

a

The Officer Next Door and Teacher Next Door programs offer HUD-owned properties at 50 percent 

discounts to law enforcement officers and teachers willing to live in economically distressed 

neighborhoods. 

b

Under the Asset Control Area program, participating nonprofits agree to purchase all of the HUDowned properties located within specific geographic areas. The nonprofits receive discounts of up to 

50 percent off HUD’s list price.

c

The Dollar Homes program allows local governments to purchase eligible HUD-owned properties for 

one dollar. The properties made available through the program are those HUD is unable to sell within 6 

months.

8

FHA insures most of its mortgages for single-family homes under its Mutual Mortgage 

Insurance Fund, which is funded by borrowers’ insurance premiums and covers lenders’ 

claims on foreclosed properties. The revenue HUD receives from selling these properties is 

deposited in the fund.

Program Number of properties

Regular sales 60,634

Officer Next Doora 1,168

Teacher Next Doora 925

Discount Sales 1,226

Asset Control Areab 795

Dollar Homesc 275

Total 65,023
Page 6 GAO-04-208 Single-Family Housing

HUD offers discounts of 10, 15, and 30 percent to nonprofit organizations. 

The size of the discount depends on several factors: whether a property in 

as-is condition is eligible for FHA insurance, whether it is located in a 

revitalization area,9

 and whether it is sold individually or in a package of 

five or more homes. HUD inspects and appraises all foreclosed properties 

to determine whether they are again eligible for FHA mortgage insurance. 

FHA will insure mortgages only on properties that meet HUD’s minimum 

property standards and local building codes or that need less than $5,000 in 

repairs in order to meet these standards. Properties needing more than 

$5,000 in repairs are considered uninsurable. For purposes of the Discount 

Sales Program, HUD then differentiates properties by location. All 

insurable properties receive a 10 or 15 percent discount whether or not 

they are located in a revitalization zone. The 15 percent discount is only 

applied if the property is part of a group of five or more properties 

purchased in a single transaction. Uninsurable properties lying outside 

revitalization areas also receive these discounts, but those located within 

revitalization areas are eligible for the steepest discount—30 percent. 

Under the Discount Sales Program, HUD has two methods of selling 

properties to nonprofits: competitive bidding and noncompetitive sales. 

Both methods allow discounts for nonprofits. Under the competitive 

process, HUD establishes a list price for the properties but will accept bids 

that are lower. HUD posts the properties, with their list prices, on the 

Internet in its general listings and accepts bids from prospective owneroccupants and nonprofits, but not investors, for a priority period of 10 to 30 

days, depending on the geographic area. HUD awards the property to the 

owner-occupant or nonprofit with the highest bid. If the highest bidder is a 

nonprofit, HUD grants a 10 or 15 percent discount off the bid price when it 

closes on the home. For properties that fail to sell during this priority 

period, HUD then accepts bids from the general public, including investors.

The noncompetitive sales method applies only to uninsurable properties. 

HUD lists these properties separately from its general listings and makes 

them available to nonprofits through a HUD contractor’s Web site. 

Nonprofits have a priority period of 5 days to express interest in the 

properties at HUD’s list price. If more than one nonprofit expresses interest 

in a property, HUD selects the buyer by lottery. As with competitive sales, 

the discount is applied at closing. Properties that are not sold 

9

Revitalization areas are HUD-designated locations characterized by high levels of 

foreclosures, very low incomes, and low homeownership rates.
Page 7 GAO-04-208 Single-Family Housing

noncompetitively are placed in HUD’s general listings and made available 

for sale on a competitive basis. 

Nonprofits that purchase properties under the Discount Sales Program are 

responsible for rehabilitating them as needed to meet HUD’s minimum 

property standards and local building codes. Nonprofits are required to 

limit their resale price to no more than 110 percent of their “net 

development cost,” or the sum of their allowable costs for acquiring, 

rehabilitating, and reselling the properties. Nonprofits must also sell the 

homes to buyers whose incomes do not exceed 115 percent of their area’s 

median income, adjusted for family size. 

HUD’s four HOCs administer the Discount Sales Program and oversee the 

participating nonprofits. The HOCs process nonprofits’ applications to 

participate in the program and monitor nonprofits for compliance once 

they begin purchasing, rehabilitating, and reselling homes. To help monitor 

the program, HUD requires nonprofits to submit annual reports to the 

appropriate HOC by February 1 of each year. The reports must provide 

information on properties the nonprofits have bought, rehabilitated, and 

resold, including repair costs, prices to homebuyers, and homebuyers’ 

incomes. HOC staff also conduct on-site visits to nonprofits and properties 

to review files and inspect repairs, among other things. When a nonprofit 

fails to follow the program’s requirements, HOCs may remove the nonprofit 

from the program. 

In recent years, HUD has changed some of its program requirements to 

increase its oversight of nonprofits. For example, in 2000 HUD issued 

guidance establishing uniform standards for nonprofits applying to 

participate in the program. The guidance outlines specific information 

nonprofits must submit in applying for the program, mandates that 

nonprofits recertify with HUD every 2 years, and requires that nonprofits 

answer detailed questions about their ability to carry out affordable 

housing programs. 

To address concerns raised in the HUD Inspector General’s 2001 report on 

the program, HUD issued additional guidance in December 2001 designed 

to strengthen the program’s reporting and accountability requirements. 

Until this guidance was issued, nonprofits needed to meet HUD’s annual 

reporting and net development cost requirements only for properties 

purchased at a 30 percent discount. The guidance expanded annual 

reporting and resale price requirements to all properties, regardless of 
Page 8 GAO-04-208 Single-Family Housing

discount level, and clarified HUD’s net development cost calculation by 

providing a detailed list of allowable and unallowable costs. 

Also in response to the Inspector General’s report, HUD issued guidance in 

January 2002 designed to tighten eligibility requirements for nonprofits. 

Among other things, the guidance described circumstances that could 

create a conflict of interest between nonprofits and their business partners. 

In addition, it required that nonprofits be incorporated as 501(c)(3) 

organizations for at least 2 years and have a minimum of 2 consecutive 

years of affordable housing experience within the last 5 years. Finally, to 

accommodate HUD’s on-site reviews, the guidance required nonprofits to 

maintain property records in a specified format.

HUD did not implement all of the Inspector General’s recommendations. 

Specifically, the Inspector General’s report recommended that HUD 

suspend the program and evaluate it to determine whether the program 

was viable or should be discontinued. HUD Office of Housing officials told 

us they developed a proposal for a contractor study of the program but that 

the proposal was never funded. HUD officials said they did not suspend the 

program because they felt the improvements made following the Inspector 

General’s review would prevent further problems.

In 2002, the Discount 

Sales Program Cost 

HUD at Least $18.8 

Million

We estimate that the Discount Sales Program cost HUD between $18.8 and 

$23.9 million in calendar year 2002. Most of this cost, between $15.1 and 

$20.2 million, was a reduction in net revenue resulting from HUD’s selling 

properties through the program rather than through its regular sales 

process.10 Personnel expenses for administering the program accounted for 

the remaining $3.7 million of HUD’s cost.

10We defined net revenue as the price for which HUD sells a property minus HUD’s holding 

and selling costs. These costs include discounts to nonprofits, other homebuyer sales 

incentives, payments to management and marketing contractors, property taxes, broker’s 

fees and commissions, and financing and closing costs. HUD was not able to provide us with 

property-specific data on certain overhead expenses that it allocates among the properties 

in its inventory. As a result, we did not include these expenses in our analysis. Because these 

expenses are relatively small, we believe this omission did not have a significant effect on 

our estimates. 
Page 9 GAO-04-208 Single-Family Housing

The Discount Sales Program 

Reduced HUD’s Net 

Revenue 

The net revenue HUD receives from each property it sells is less than the 

property’s selling price because HUD incurs certain holding and selling 

costs. Some of these costs are common to both discounted and regular 

HUD property sales, while others are not. For example, on a regular sale, 

HUD pays the homebuyer’s closing and financing costs and the sales 

commission of the successful selling broker, within certain guidelines. 

HUD does not pay either of these costs for properties sold through the 

Discount Sales Program. HUD does not require a selling broker for the 

properties nonprofits purchase through the program; consequently, there is 

generally no selling broker’s commission for these transactions. HUD 

incurs other types of costs for all properties whether or not they are part of 

the program. These costs include (1) the fees and reimbursable expenses it 

pays to management and marketing contractors responsible for inspecting, 

appraising, securing, maintaining, and selling HUD-owned properties; (2) 

sales incentives in the form of cash allowances that HUD periodically 

offers to homebuyers—including nonprofits—that close relatively quickly 

on executed sales contracts; (3) the listing broker’s fee; and (4) the 

property taxes for the period when HUD owned the home. 

To determine the impact of the Discount Sales Program on HUD’s net 

revenues (i.e., the selling price minus holding and selling costs) we 

compared the estimated net revenues HUD received for the discounted 

properties with the estimated net revenues HUD would have received if it 

had sold the properties through its regular sales process.11 Using data from 

HUD’s SAMS and the U.S. Census Bureau, we made this determination for

11We derived our estimates from a model we developed that predicts the net revenue HUD 

received from each property it sold during calendar year 2002 as a function of several 

variables, including whether HUD sold the house through the Discount Sales Program. The 

model allowed us to estimate the effect of the program on HUD’s net revenue, while holding 

constant the effects of other factors. We made this estimate by comparing (1) the net 

revenue our model predicted HUD would have received for each discounted property had 

the property been sold through the regular sales process with (2) the net revenue our model 

predicted HUD would have received by selling the property through the Discount Sales 

Program. Even though we knew the actual amount HUD received by selling the property 

through the Discount Sales Program, we made the comparison between two estimated 

values in order to be consistent. Each estimated value contained an error term that captured 

the effects of omitted variables unavailable for the modeling process. By comparing two 

estimated values, we removed the influence of the omitted variables from our comparison, 

leaving the effect of the Discount Sale Program. Appendix II provides additional information 

about our model.
Page 10 GAO-04-208 Single-Family Housing

1,19412 properties that HUD sold through the program in calendar year 

2002. We used a statistical model that included data for these properties 

and approximately 4,00013 properties HUD sold through its regular process 

during the same year.14 We found that by selling the 1,194 properties 

through the Discount Sales Program instead of its regular sales process, 

HUD reduced the net revenue it received in calendar year 2002. 

Specifically, we estimate that the total reduction in HUD’s net revenue was 

between $15.1 and $20.2 million,15 an average of between $12,672 and 

$16,945 per property. (See app. II for a detailed discussion of our statistical 

analysis.) Without the program, and with all other things remaining equal, 

cash flows into HUD’s insurance fund would have increased by that 

amount.

As shown in table 2, the overall and average reductions in net revenue 

varied according to the discount level. The properties sold with 10 percent 

discounts accounted for about two-thirds of the homes that HUD sold 

through the program in calendar year 2002, but for less than half the total 

estimated reduction in net revenue. In contrast, the properties sold with 30 

percent discounts represented less than one-third of the total properties 

sold but more than 40 percent of the overall reduction in net revenue. 

Finally, the properties with 15 percent discounts accounted for about 9 

percent of the total properties and between 7 and 10 percent of the overall 

reduction in HUD’s net revenue. 

According to HUD officials, the agency’s database somewhat overstates the 

number of properties sold with a 10 percent discount (the most common 

type) and somewhat understates the number sold with a 15 percent 

discount (the least common type). The officials said this overstatement 

occurs because HUD does not always update its database to reflect the fact 

12HUD sold a total of 1,226 properties through the Discount Sales Program in calendar year 

2002. Because we were unable to match 32 of the properties to census tract data, we 

dropped them from our analysis, leaving 1,194 properties. 

13These were all of the homes HUD sold through its regular process that were located in the 

same census tracts as the properties it sold through the Discount Sales Program.

14Our analysis assumed that in the absence of the program, HUD would have sold the 1,194 

properties through its regular sales process. Accordingly, our statistical analysis excluded 

data on properties that were not sold through either the Discount Sales Program or HUD’s 

regular process.

15We are 90 percent confident that HUD’s actual loss in net revenue was between these two 

values.
Page 11 GAO-04-208 Single-Family Housing

that a property, indicated in the database as being sold with a 10 percent 

discount, may actually have been sold at a 15 percent discount if it was part 

of a group of five or more properties bought in a single transaction. As a 

result, our analysis may overestimate the reduction in net revenue for 

properties discounted by 10 percent and underestimate it for those 

discounted by 15 percent. 

Table 2: Estimated Reduction in Net Revenue Due to the Discount Sales Program in 

Calendar Year 2002, by Discount Level

Sources: HUD and the U.S. Census Bureau.

Note: Our confidence level for the estimates is 90 percent.

As shown in table 3, the overall and average reductions in net revenues also 

varied by HOC. A major reason for this variance was differences among the 

centers in the proportion of their properties sold with 30 percent discounts. 

Because 30 percent discount properties cost HUD more in net revenue than 

properties at the other discount levels, the HOC with the highest 

proportion of 30 percent properties—Santa Ana—had the greatest 

reduction in net revenue. The HOC with the lowest proportion—Denver—

had the smallest reduction in net revenue.

Discount level

Number of 

properties sold

Total estimated 

reduction in net 

revenues 

(dollars in millions) 

Average estimated 

reduction in net 

revenues per 

property

10 percent 744 $6.6 – $9.3 $8,844 – $12,453

15 percent 102 1.0 – 1.9 10,223 – 18,997

30 percent 348 7.5 – 9.0 21,572 – 25,947

Total 1,194 $15.1 – $20.2 $12,672 – $16,945
Page 12 GAO-04-208 Single-Family Housing

Table 3: Estimated Reduction in Net Revenue Due to the Discount Sales Program in 

Calendar Year 2002, by Homeownership Center 

Sources: HUD and the U.S. Census Bureau.

Note: The estimates may not add up to totals due to rounding. Our confidence level for the estimates 

is 90 percent.

HUD officials told us they were aware that the program reduced the 

agency’s net revenue from property sales. However, HUD has not evaluated 

whether the program is reducing HUD’s property inventory in a timely, 

efficient, and cost-effective manner, as intended.

HUD Incurred 

Administrative Costs 

Operating the Discount 

Sales Program 

To determine the impact of the Discount Sales Program on HUD’s 

administrative costs in calendar year 2002, we compared the administrative 

costs HUD incurred under the program to what HUD would have incurred 

had the discounted properties been sold through HUD’s regular process. 

According to HUD, in administering the Discount Sales Program, HOC staff 

perform tasks that are not part of HUD’s regular home-selling process. For 

example, for the Discount Sales Program, center staff approve and recertify 

participating nonprofit organizations and monitor the nonprofits’ 

compliance with program requirements—tasks they do not perform for the 

regular sales process. As a result, HUD’s administrative cost per property is 

lower for its regular sales process than it is for the Discount Sales Program. 

HUD officials told us that for this reason and the small volume of 

properties sold through the Discount Sales Program, selling the discounted 

properties through HUD’s regular process would have had no measurable 

effect on the administrative costs for the regular sales process. 

The bulk of HUD’s administrative costs for the Discount Sales Program are 

the salaries and benefits of staff who work on the program. According to 

HUD officials, most of these staff split their time among several programs, 

Homeownership 

center

Number of 

properties sold

Total estimated 

reduction in net 

revenues 

(dollars in millions)

Average estimated 

reduction in net 

revenues per 

property

Atlanta 296 $2.8 – $3.8 $9,317– $12,744

Denver 183 1.2 – 2.3 6,551 – 12,689

Philadelphia 359 3.5 – 4.7 9,712 – 13,061

Santa Ana 356 7.7 – 9.4 21,592 – 26,542

Total 1,194 $15.1 – $20.2 $12,672 – $16,945
Page 13 GAO-04-208 Single-Family Housing

but HUD’s time and attendance system does not record the time they spend 

on each one. Therefore, we relied on estimates from HUD to determine 

how many staff years were spent on the program in calendar year 2002 and 

the associated costs. Although HUD incurred other types of costs to 

administer the program, such as mailing costs and travel expenses for 

visiting nonprofit offices, these were minor compared with the personnel 

costs and were not included in HUD’s estimate. 

HUD estimates that its personnel costs for the Discount Sales Program 

were approximately $3.7 million in calendar year 2002.16 (See table 4.) 

HUD’s estimate was based on information provided by its HOCs and Office 

of Housing, which showed that their staffs devoted a total of 45 staff years 

to the program. The number of staff years and the associated cost varied 

across offices, however. Among the HOCs, the Atlanta center had the most 

staff years and highest personnel costs and the Denver center the fewest 

staff years and lowest personnel costs. HUD’s Office of Housing devoted 

the equivalent of about one staff year to the program. HUD headquarters 

and HOC officials told us that in the absence of the Discount Sales 

Program, these staff years would have been dedicated to administering 

other HUD programs, so that HUD would have incurred the personnel 

costs with or without the program.

Table 4: HUD’s Estimate of Personnel Costs for the Discount Sales Program in Calendar Year 2002, by Homeownership Center

Source: HUD.

16HUD officials stressed that the estimate of personnel costs was only a rough 

approximation of the agency’s actual costs.

Atlanta

center

Denver 

center

Philadelphia

center

Santa Ana

center

HUD

headquarters Total

Staff years 17.0 5.2 11.8 10.4 0.8 45.1

Personnel costs $1,386,740 $423,930 $957,919 $844,599 $75,263 $3,688,451
Page 14 GAO-04-208 Single-Family Housing

The Discount Sales 

Program Is Not Likely 

to Benefit Most 

Homebuyers 

Financially but Can 

Help Them Access 

Homeownership 

Services and 

Assistance

Our analysis of 238 properties sold under the Discount Sales Program in 

calendar year 2002 indicates it is likely that most homebuyers did not 

benefit financially from the program. Specifically, assuming that nonprofits 

and homebuyers had the same rehab costs, we estimate that 76 percent of 

the homebuyers would have spent less if they had purchased the properties 

through HUD’s regular sales process and paid for the rehab work 

themselves. In part, the lack of financial benefit to homebuyers is 

attributable to the program’s rules, which authorize nonprofits to pass on 

costs that homebuyers would likely not incur using the regular sales 

process. Despite the program’s limited financial benefits, it may help 

homebuyers access a range of services and assistance—such as 

homeownership counseling, down payment assistance, and home 

maintenance courses—that are beneficial but also available from other 

sources. The program may also help improve neighborhood conditions by 

rehabbing and putting back on the market homes that might otherwise 

remain vacant or in disrepair. 

The Financial Benefit of the 

Program to Most 

Homebuyers is Doubtful 

To determine the extent to which homebuyers benefited financially from 

purchasing a rehabilitated home through the Discount Sales Program, we 

performed a statistical analysis comparing what the homebuyers actually 

paid for these homes with our estimate of what they would have spent had 

they purchased the homes under HUD’s regular process and paid for the 

rehab work themselves. Our analysis assumed that in the absence of the 

Discount Sales Program, a homebuyer would be able to (1) purchase the 

same home and rehabilitate it to the same extent as the nonprofit and (2) 

incur the same rehab costs as the nonprofit.17 We also assumed that the 

homebuyer would inhabit the home during the rehabilitation and therefore 

would not incur housing expenses for two residences during that period.18

We performed this analysis on 238 properties that nonprofits purchased 

17HUD does not collect the data necessary to test this assumption. In addition, the data HUD 

provided us on nonprofits’ rehab costs did not always include other, relatively minor, 

expenses that an individual homebuyer could also incur, such as fees for rehab consultants, 

construction permits, and termite inspection services. However, as discussed later in this 

section, our overall finding does not change even under the assumption that a homebuyer 

would pay significantly more than a nonprofit to rehab a home.

18While this assumption would not hold true in all cases, more than half of the properties 

covered by our analysis received less than $15,000 in rehab work and some received none at 

all, suggesting that the rehab work was generally not so extensive as to require vacating the 

home.
Page 15 GAO-04-208 Single-Family Housing

and resold between February 1 and December 31, 2002.19 These properties 

were the only ones for which HUD could provide the rehab costs and 

selling prices to homebuyers at the time of our review. (See app. II for a 

detailed discussion of our statistical analysis.) 

Assuming equal rehab costs for nonprofits and homebuyers, we estimate 

that 182 of the 238 homebuyers, or 76 percent, did not benefit financially by 

purchasing a rehabbed property from a nonprofit that bought the property 

through the Discount Sales Program. That is, the buyers would have spent 

less had they purchased the property through HUD’s regular sales process 

and paid for the rehab work themselves. Under the assumptions of our 

analysis, we estimate that these purchasers spent an average of $9,200 

more buying the house through the program than they would have spent 

otherwise. Our analysis indicated that the other 24 percent of the 

homebuyers benefited financially from the program, because purchasing 

the homes through HUD’s regular sales process and rehabbing them would 

have been more expensive. We estimate that these homebuyers saved 

$9,200, on average, by purchasing through the Discount Sales Program. 

Because nonprofits may, in some circumstances, be able to rehab a home 

more cheaply than an individual homebuyer, we also performed the 

analysis assuming that a homebuyer would pay 25 percent more than a 

nonprofit for the same rehab work. Even under that assumption, we 

estimate that 59 percent of the homebuyers would not have benefited 

financially from the program. More specifically, we estimate these 

purchasers spent an average of $8,000 more buying the house through the 

program than they would have spent otherwise. We estimate that the 

remaining 41 percent of homebuyers saved $10,100, on average, by 

purchasing a home through the program. 

Our estimates of the extent to which homebuyers did or did not benefit 

varied according to the discount level of the property purchased. Assuming 

equal rehab costs for nonprofits and homebuyers, we estimate that 79 

percent of the homebuyers purchasing houses that had been discounted 10 

percent saw no financial benefit. For the properties with 15 percent 

discounts, we estimate that more than 90 percent did not benefit. However, 

for the properties with 30 percent discounts, we estimate that one-half of 

the homebuyers saw some financial benefit. (See table 5.) 

19We used this time frame because HUD made significant changes to the program that 

became effective on February 1, 2002. For example, HUD expanded its annual reporting and 

resale price requirements to properties sold with 10 and 15 percent discounts. 
Page 16 GAO-04-208 Single-Family Housing

One reason homebuyers did not benefit financially, according to our 

analysis, was that nonprofits sometimes resold the properties for more 

than the program allowed.20 This finding was especially strong for 

purchases in the 15 and 30 percent discount categories. Had the nonprofits 

not overcharged the homebuyers in these cases, we estimate that more 

than one-third of the homebuyers who bought properties with a 15 percent 

discount and more than three-quarters of those who bought properties with 

a 30 percent discount would have benefited financially.

Table 5: Estimated Number of Homebuyers Who Did and Did Not Benefit Financially 

by Purchasing Homes through HUD’s Discount Sales Program

Sources: HUD and the U.S. Census Bureau. 

Our analysis did not take into account certain factors that are difficult to 

quantify but may make the program either more or less beneficial from a 

homebuyer’s perspective. For example, some homebuyers may be willing 

to incur significant costs to avoid the time, difficulty, and inconvenience 

involved in selecting materials, obtaining and evaluating contractor bids, 

residing in a property undergoing rehab work, and possibly obtaining a 

separate loan to finance the rehab work.21 Conversely, some homebuyers 

may not view these tasks as major obstacles and may see significant 

benefits to controlling the rehab process themselves, such as the ability to 

select the materials used and the ability to oversee the rehab work as it 

progresses. 

20The issue of nonprofits violating resale price restrictions is discussed in more detail in the 

next section of the report.

Discount level

Number of 

properties

Number of homebuyers 

who benefited financially 

Number of homebuyers 

who did not benefit 

financially

10 percent 143 30 113

15 percent 51 4 47

30 percent 44 22 22

Total 238 56 182

21Although a homeowner would incur fees and interest costs for such a loan, homebuyers 

financing properties purchased through the Discount Sales Program incur similar expenses 

because the cost of the rehab work is included in the nonprofit’s selling price and therefore 

is reflected in the homebuyer’s mortgage costs.
Page 17 GAO-04-208 Single-Family Housing

The Discount Sales 

Program’s Rules Reduce the 

Likelihood That Buyers Will 

Benefit Financially

Some of the Discount Sales Program’s rules make it unlikely that 

purchasing a property from a nonprofit that purchased the property from 

HUD at a 10 or 15 percent discount will benefit homebuyers more than 

purchasing the same property from HUD through the regular sales process. 

For example, HUD allows nonprofits to resell discounted properties for up 

to 110 percent of the “net development cost,” or the cost of buying the 

property plus allowable rehab, holding, and selling costs. The 10 percent 

markup helps nonprofits to cover the overhead expenses they incur by 

participating in the program. However, taking a 10 percent markup on a 

property purchased at a 10 or 15 percent discount effectively cancels out all 

or most of the discount. As a result, the price of the home to the eventual 

homebuyer reflects little, if any, of HUD’s discount to the nonprofit.

Furthermore, program rules authorize nonprofits to include in their 

calculations of net development cost certain “allowable” financing and 

closing costs they incur in buying discounted HUD properties. As a result, a 

homebuyer who purchases a property from a nonprofit pays not only his or 

her own financing and closing costs but—through the sales price—the 

nonprofit’s as well. In contrast, when a homebuyer purchases a property 

using HUD’s regular sales process, HUD pays allowable financing and 

closing costs on the buyer’s behalf. Also, a nonprofit’s net development cost 

may include the principal and interest payments for the mortgage on the 

property while the property is being renovated for up to 6 months. Raising 

the nonprofit’s net development cost effectively raises the price for the 

eventual homebuyer, who could have avoided some of these expenses by 

purchasing the house directly from HUD and, if possible, inhabiting it 

during the renovation.

The Discount Sales Program 

May Help Homebuyers 

Access Certain Services and 

Assistance and Improve 

Neighborhood Conditions 

According to HUD and nonprofit officials, many of the families who 

purchase properties through the program are first-time homebuyers. 

Accordingly, HUD strongly encourages nonprofits to provide 

homeownership counseling services and requires participants to submit 

“affordable housing plans” detailing, among other things, the services and 

assistance that low- and moderate-income homebuyers using the program 

can expect to receive. During our visits to HUD’s homeownership centers, 

we reviewed the affordable housing plans for a judgmental sample of 17 

nonprofits. The plans showed that the nonprofits offered a wide range of 

services and assistance to homebuyers, either directly or through referrals 

to other agencies. The services included mortgage credit counseling, 

“hotlines” homebuyers could call with questions, and courses on budgeting 
Page 18 GAO-04-208 Single-Family Housing

and home maintenance. Some nonprofits also offered assistance with 

down payments and closing costs. HOC staff told us that these services and 

assistance were typical of those provided by most participating nonprofits.

Both HUD and nonprofit officials told us they believed that providing such 

services to new homebuyers facilitated homeownership among low-income 

families that might otherwise have a hard time purchasing a home. These 

officials also said that the services helped minimize the likelihood of 

default by preparing families for the responsibilities of homeownership. 

However, we found that similar services were widely available outside the 

Discount Sales Program. For example, HUD itself provides financial 

support to hundreds of housing counseling agencies across the country. 

Any prospective homebuyer can access these services at no cost.

According to HUD, the Discount Sales Program also generates benefits and 

serves policy objectives, such as neighborhood revitalization and stability, 

that extend beyond the individual households that purchase properties. 

Some HUD and nonprofit officials told us they believe that the Discount 

Sales Program may help to improve neighborhood conditions by 

supporting the rehabilitation and sale of properties that would otherwise 

be vacant and in disrepair, reducing surrounding property values, and 

becoming magnets for vandalism and trespassing. For example, one 

nonprofit official told us that by purchasing and rehabbing multiple 

properties over a period of several years, the organization had not only 

improved the housing stock of one community but also helped create an 

environment that encouraged economic development and social service 

opportunities nearby. HUD officials also told us that many prospective 

owner-occupants are not willing to purchase homes requiring significant 

rehab work because of the difficulty and risks of undertaking a rehab 

project. They said that even if owner-occupants were to purchase these 

properties, they might do less rehab work than a nonprofit would or not 

rehab them at all. Finally, HUD believes that by promoting homeownership 

and property rehabilitation, the program has stabilizing effects on 

neighborhoods and contributes to property values—factors that reduce the 

risk of foreclosure and losses to FHA’s insurance fund. Although expansion 

of homeownership opportunities and neighborhood revitalization are 

objectives and potential benefits of the program, HUD has not studied the 

extent to which the program is serving these ends.
Page 19 GAO-04-208 Single-Family Housing

Limited Monitoring 

Efforts Have 

Uncovered Numerous 

Violations, but 

Effective Enforcement 

Has Been Difficult

The HOCs use two monitoring tools to assess nonprofits’ compliance with 

program requirements: desk reviews of annual reports and on-site 

evaluations. However, the HOCs had trouble conducting desk reviews 

because many program participants turned their reports in late or not at all, 

and many reports were incomplete. In addition, the HOCs’ use of on-site 

reviews was uneven, with two centers conducting them routinely and the 

other two doing few or none. Even with these problems, the HOCs’ 

monitoring efforts uncovered numerous violations of program rules, such 

as making excess profits by reselling discounted properties for more than 

the program allowed. The HOCs have removed many nonprofits for 

noncompliance but lack an effective mechanism for enforcing 

requirements concerning excess profits. 

Effectiveness of Desk 

Reviews is Hampered by 

Missing or Incomplete 

Information

Nonprofits participating in the Discount Sales Program are required to 

submit annual reports to the HOCs each February 1 that provide 

information on the properties purchased under the program the previous 

calendar year.22 The required information includes the status of the 

property (i.e., whether it has been rehabbed and resold), the rehab costs, 

and the selling price to the homebuyer. Nonprofits must also provide 

documentation, such as settlement statements, giving detailed financial 

information on the purchase and resale of the properties. 

Desk reviews of these reports are HUD’s primary method of determining 

whether nonprofits comply with key program requirements, such as those 

restricting the resale prices of rehabilitated homes and the purchasers’ 

income levels. However, the effectiveness of desk reviews as a monitoring 

tool has been limited because many nonprofits have not submitted annual 

reports on time, and others have provided incomplete information. 

Specifically, as of July 2003—more than 5 months after the annual reports 

were due—HUD lacked reports from nonprofits accounting for more than 

half of the 626 properties it estimates were bought, rehabbed, and resold in 

calendar year 2002. The HOCs had reports for properties resold to 

homebuyers from only 44 of the 166 nonprofits that purchased discounted 

properties in calendar year 2002. Other nonprofits submitted reports that 

lacked all of the data the HOCs needed to assess the participants’ 

22HUD has required annual reports on properties sold at a 30 percent discount since 

December 1994. Beginning with reports due in February 2003, HUD expanded the 

requirement to include all properties sold at a discount. 
Page 20 GAO-04-208 Single-Family Housing

compliance with program requirements. For example, as of April 2003, 

more than half of the annual reports received at the Denver HOC did not 

contain the information necessary to determine the nonprofits’ net 

development costs for the properties. As a result, staff could not determine 

whether the nonprofits had sold their properties at prices that were within 

program limits. Similarly, more than one-third of the reports received by 

the Atlanta HOC as of July 2003 did not contain the required certification of 

the homebuyers’ income levels. Without this information, the HOC had no 

assurance that the properties were sold to homebuyers with low and 

moderate incomes, as required. 

According to HOC officials, efforts to collect missing data and resolve 

other reporting issues can take months. For example, staff at the Atlanta 

HOC told us that they spent large amounts of time calling and writing 

nonprofits to gather the information missing from the annual reports. 

Although three of the HOCs—Atlanta, Denver, and Santa Ana---had 

originally planned to complete their desk reviews by the end of April 2003, 

these reviews were still under way in mid-July 2003. At that time, the 

remaining HOC—Philadelphia—had completed reviews of just 16 percent 

of its properties.

The reporting problems occurred despite the HOCs’ efforts to remind 

nonprofits of the reporting requirements and to provide training on the 

program rules. For example, all four HOCs sent reminder letters to 

nonprofits several weeks before the annual reports were due. In addition, 

HOC officials told us they provided either one-on-one or group training to 

nonprofits on submitting annual reports and meeting other program 

requirements. HOC officials speculated that a major reason for the 

reporting problems was that many nonprofits lacked adequate 

administrative capacity. However, they also said that carrying out in-depth 

assessments of administrative capacity as part of the initial approval 

process would require a costly on-site evaluation of every applicant.

In October 2003, HOC officials told us that as a result of their follow-up 

efforts, they had made significant progress in obtaining annual reports 

from nonprofits that had not reported earlier in the year. However, during 

the long time it takes the HOCs to obtain and review annual reports, 

nonprofits may continue to purchase more homes and violate program 

rules. In addition, according to HOC officials, many nonprofits that had 

failed to report had either withdrawn or been removed from the program, 

leaving little incentive to report. Consequently, it is unlikely that HUD will 
Page 21 GAO-04-208 Single-Family Housing

ever know whether these nonprofits followed program requirements in 

rehabbing and reselling discounted properties.

The Number of On-Site 

Reviews Varied Across 

Homeownership Centers

HUD’s guidelines not only require that nonprofits allow on-site reviews of 

their operations as a condition of program participation but also outline the 

types of records participants must maintain and make available for HUD’s 

on-site review. On-site reviews generally allow for a more in-depth 

assessment of a nonprofit’s program activities than desk reviews. For 

example, on-site reviews may include examining invoices and cancelled 

checks to determine the validity of claimed rehab costs. They may also 

involve inspection of rehabbed homes and interviews with homeowners.

We found that only two of the four HOCs—Atlanta and Denver—routinely 

used on-site reviews as a monitoring tool in calendar year 2002. Atlanta 

HOC officials told us that they tried to review each of their medium- and 

high-risk nonprofits at least once every 2 years.23 Consistent with this 

policy, the center performed 22 on-site reviews in calendar year 2002, 

covering about half of the nonprofits that had purchased discounted homes 

that year. The Atlanta HOC had trained staff stationed throughout the 

center’s geographic jurisdiction to perform the on-site reviews and also 

employed two specialists with backgrounds in home construction. The 

Denver HOC performed on-site reviews of 10 of the 23 nonprofits it sold 

properties to in calendar year 2002. Officials there said that they targeted 

nonprofits using desk reviews, homebuyers’ complaints, and applications 

to the program. The reviews were performed by staff working out of the 

HOC, with assistance from other HUD staff stationed near the nonprofits.

In contrast to the Atlanta and Denver centers, the other two HOCs—

Philadelphia and Santa Ana—used on-site reviews rarely or not at all. The 

Philadelphia HOC, which sold properties to 48 nonprofits in calendar year 

2002, conducted just two on-site reviews during that year, citing a shortage 

of staff as the primary reason. Center officials told us that they plan to use a 

contractor to conduct on-site reviews of nonprofits with known 

performance problems and that the contractor will be required to have 

construction specialists assist in these reviews. The Santa Ana HOC, which 

sold properties to 52 nonprofits in calendar year 2002, did not perform any 

on-site reviews. Santa Ana HOC officials told us that the center’s large 

23The Atlanta HOC designates nonprofits that purchase five or more properties in a year as 

medium- or high-risk.
Page 22 GAO-04-208 Single-Family Housing

geographic jurisdiction made it impractical for them to travel to nonprofits’ 

offices. To compensate for the lack of on-site reviews, the Santa Ana center 

uses an in-depth version of the desk review, requiring nonprofits to submit 

large amounts of supporting documentation, including invoices, with their 

annual reports. A Santa Ana official said that this is the same 

documentation that HOC staff examine during on-site reviews but 

acknowledged that desk reviews do not include property inspections.

Despite Monitoring 

Limitations, HOCs 

Uncovered Numerous 

Program Violations

The HOCs identified violations of program requirements during both desk 

and on-site reviews. Primary among these were violations of the ceiling for 

resale prices: 110 percent of the net development cost.24 The desk reviews 

the HOCs had conducted as of July 2003 showed that nonprofits often did 

not comply with the resale restriction. This problem occurred despite the 

fact that in December 2001 HUD had issued guidance to nonprofits 

clarifying net development costs and providing detailed instructions for 

calculating them. 

As shown in figure 1, 28 of the 44 nonprofits that had submitted annual 

reports as of July 2003 overcharged homebuyers for one or more 

properties. These violations occurred on about 124 (47 percent) of the 265 

properties covered by the annual reports and resulted in homebuyers being 

overcharged an estimated total of $704,720.25 The amount of the estimated 

overcharges varied significantly from property to property, ranging from 

under $10 to more than $40,000. For example, one nonprofit closed on a 

discounted home in New York for $117,600 in October 2002 and spent 

about $41,000 to rehab the property. The nonprofit subsequently resold the 

property for $234,000, or $43,333 more than the program allowed. 

Assuming the homebuyer had secured a 30-year loan at 6 percent interest 

(the prevailing rate at the time the homebuyer made the purchase), the 

overcharge increased the homebuyer’s annual mortgage payments by more 

than $3,100.

24In purchasing a discounted property, a nonprofit must sign an addendum to the sales 

contract stating that it will adhere to this rule.

25This figure is an estimate because as of July 2003 the HOCs had not made final 

determinations of excess profits for all of the properties they had reviewed. As a result, the 

actual amount of excess profits for these properties may be higher or lower than this 

amount.
Page 23 GAO-04-208 Single-Family Housing

Figure 1: Resale Price Violations Disclosed by Desk Reviews of Nonprofits’ Annual 

Reports on Calendar Year 2002 Program Activity

The HOCs’ desk reviews also identified three cases in which nonprofits 

violated program requirements by reselling discounted properties to 

homebuyers whose incomes exceeded 115 percent of the area median 

income. For example, the Denver HOC found that one of its nonprofits sold 

a Texas home to a buyer whose income was 141 percent of the area median 

income, adjusted for family size.

The HOCs’ on-site reviews also revealed instances of serious 

noncompliance, underscoring the importance of these reviews as a 

monitoring tool. Among these violations were a lack of auditable records, 

unallowable rehabilitation costs, and conflicts of interest between 

nonprofits and their rehabilitation contractors. For example, one review 

disclosed that the nonprofit had made bulk purchases of the materials it 

needed to rehabilitate discounted properties but, contrary to program 

requirements, did not maintain records showing the costs of these 

purchases or the materials that were used for each home. As a result, the 

reviewers could not verify the net development cost for any of these 

properties. In another on-site review, the Atlanta staff found that the 

nonprofit was not in control of the day-to-day operations of its discount 

property purchases. Instead, the nonprofit allowed its affiliated contractors 

and realtors to control the buying, rehabbing, and selling of the properties 

Atlanta

Denver

Philadelphia

Santa Ana

Nonprofits with

resale price violations 

out of all that reported

Homeownership

center

Properties with

resale price violations 

out of all properties reviewed

Total

estimated

excess profits

$123,059

$253,926

$186,942

$140,793

9 12

12 17

27 58

3 6

4 9

34 93

Total 44 124 265 $704,720

18 37

45 77

Denotes number of nonprofits or properties with violations out of total.

Source: HUD.

28
Page 24 GAO-04-208 Single-Family Housing

acquired through the Discount Sales Program and to share in the profits 

from the sale.

HOCs Have Removed 

Violators from the Program 

but Lack Effective Means to 

Enforce Requirements on 

Excess Profits 

To hold nonprofits accountable for program violations, the HOCs may use 

two main enforcement tools: (1) removing participants from the program 

and (2) requiring them to use excess profits to pay down overcharged 

homebuyers’ mortgages. The HOCs have often exercised their authority to 

remove nonprofits but lack an effective mechanism for enforcing 

requirements concerning excess profits. As a result, some nonprofits that 

did not comply with program requirements have retained excess profits, 

and homebuyers who were overcharged have not received financial 

restitution.

HOCs Frequently Removed 

Nonprofits from the Program, 

but the Process Has Limitations

HUD issued regulations in June 2002 authorizing the agency to remove a 

nonprofit from its roster of approved organizations for any cause HUD 

judged to be detrimental to the agency or to any of its programs.26 These 

causes include failure to comply with HUD guidance and instructions and 

failure to respond within a reasonable time to HUD inquiries, including 

requests for documentation. In recent years, the HOCs frequently used 

removal to hold nonprofits in the Discount Sales Program responsible for a 

variety of compliance problems. In calendar year 2002, for example, the 

Santa Ana HOC removed 31 nonprofits from the program, mostly for failure 

to submit annual reports, conflicts of interest, selling homes for more than 

program limits or to families that were not low- or moderate-income, and 

lack of administrative or financial capacity. In calendar year 2003, all four 

HOCs removed nonprofits that had failed to file annual reports or 

committed other program violations. For example, as of October 2003, the 

Atlanta HOC had removed 18 nonprofits from the program—more than 

one-third of the nonprofits that had purchased discounted properties in 

calendar year 2002. The other three HOCs removed a total of 63 nonprofits 

that had purchased properties that year. 

Despite its importance as an enforcement tool, HOC officials told us that 

removing nonprofits from the program had significant limitations. First, the 

process can take months to complete, allowing nonprofits to continue 

purchasing properties and possibly to commit additional violations. HOC 

26Prior to that time, HUD did not have regulatory procedures for taking this action and 

removed nonprofits through a less formal process. 
Page 25 GAO-04-208 Single-Family Housing

staff must carefully document their justification for the action and must 

follow due process procedures that can be lengthy, particularly if a 

nonprofit appeals the removal decision. HOC officials said that once they 

decide to remove a nonprofit, they often restrict the number of properties it 

may purchase in an effort to reduce the potential for further 

noncompliance during the due process period. Second, once a nonprofit is 

removed, it has little incentive to report to HUD on the discounted 

properties it resold or to surrender any of the excess profits it may have 

earned. As a result, the centers may never learn whether these properties 

were resold at reasonable prices to low- or moderate-income homebuyers, 

and the homebuyers who were overcharged for their properties do not 

receive any financial restitution. 

HOCs Had Limited Success 

Recovering Excess Profits

In December 2001, HUD issued instructions requiring nonprofits to sign an 

addendum to every sales contract that limited the resale price of 

discounted homes to 110 percent of the net development cost. The 

instructions also mandated that nonprofits use the excess profits they earn 

by exceeding the 110 percent limit to pay down the mortgages of the 

homebuyers they overcharged. 

The four HOCs have attempted to implement this requirement by 

requesting mortgage “pay downs” from nonprofits that are making excess 

profits. However, Philadelphia HOC officials and attorneys from HUD’s 

Office of General Counsel also told us that the agency’s authority to enforce 

the requirement was not specified in regulation and was therefore in 

question. Furthermore, the attorneys said that as a practical matter the 

requirement would be difficult to enforce, as HUD would have to refer 

nonprofits that refused to comply to the Department of Justice for legal 

action. The officials said they doubted whether Justice would accept these 

cases because the amounts of money involved are generally relatively 

small—often less than $10,000—and it would be cost-prohibitive for 

Justice’s attorneys to pursue them. HUD officials added that obtaining 

enough documentation to build a convincing legal case was difficult, 

because many nonprofits do not keep proper financial records that 

adequately document the amount of excess profits earned. 

As a result of these problems, the HOCs had limited success getting 

nonprofits to use excess profits to pay down homebuyers’ mortgages. 

According to HOC officials, the nonprofits that have paid down mortgages 

did so voluntarily because they wanted to stay in the program. As of July 

2003, the HOCs’ desk reviews had identified 28 nonprofits that made an 

estimated total of $704,720 in excess profits. At that time, seven of the 
Page 26 GAO-04-208 Single-Family Housing

nonprofits had made combined mortgage pay downs of $62,002, or only 

about 9 percent of the total estimated excess profits. (See table 6.) 

Table 6: Percentage of Estimated Excess Profits Used to Pay Down Homebuyer 

Mortgages, as of July 2003 

Source: HUD.

Note: The estimated excess profits are for discounted properties that HUD sold between February 1 

and December 31, 2002, which nonprofits resold that same year. 

HOC officials told us that although some of the remaining 21 nonprofits had 

withdrawn or were removed from the Discount Sales Program, others were 

still being evaluated by HOC staff and were continuing to purchase 

discounted properties. Moreover, these nonprofits retained all of the 

excess profits they had made. For example, one nonprofit still under 

review as of October 2003 made an estimated $28,700 in excess profits on 

five discounted properties that it resold in 2002. The nonprofit did not pay 

down any mortgages, purchased 27 additional properties in 2003, and is still 

in the program. HUD’s inability to enforce its requirements on excess 

profits in a vigorous and timely manner not only deprives homebuyers that 

have been overcharged but also puts the financial interests of other 

prospective homebuyers at risk. 

Conclusions HUD’s Discount Sales Program is intended, among other things, to help 

make homes affordable for low- and moderate-income homebuyers. 

However, deficiencies in the program’s design and implementation have 

undermined its ability to serve this end. Our analysis suggests that the 

program is of questionable benefit to most homebuyers. In addition, the 

HOCs’ monitoring and enforcement efforts do not adequately ensure that 

Homeownership

center

Number of 

properties 

resold for 

more than 

program 

limits 

Estimated 

excess profits

 Amount of 

estimated 

excess profits 

used to pay 

down 

mortgages 

Percentage of 

estimated 

excess profits 

used to pay 

down 

mortgages

Atlanta 27 $123,059 $0 0%

Denver 45 $253,926 $33,330 13%

Philadelphia 18 $186,942 $0 0%

Santa Ana 34 $140,793 $28,672 20%

Total 124 $704,720 $62,002 9%
Page 27 GAO-04-208 Single-Family Housing

nonprofits are complying with requirements designed to protect 

homebuyers’ financial interests. And despite the program’s significant cost, 

HUD has not determined whether the program is meeting its objectives of 

expanding affordable housing opportunities, helping to revitalize 

neighborhoods, and reducing HUD’s property inventory in a timely, 

efficient, and cost-effective manner.

Measures to address the cost, benefit, and compliance issues raised in this 

report are likely to be expensive or have adverse effects. For example, to 

reduce the cost of the program, HUD could reduce the size of its discounts, 

dedicate fewer staff resources to the program, or both. However, these 

actions would likely reduce the program’s financial benefit to homebuyers 

and weaken HUD’s ability to oversee participating nonprofits. Conversely, 

to increase financial benefits to homebuyers, HUD could increase the size 

of its discounts, but doing so would effectively raise the cost of the 

program. 

Taken together, the program’s problems and the lack of clear solutions 

raise serious questions about whether HUD should continue to operate it. 

We recognize that contemplating the termination of the program involves 

trade-offs. In the absence of the program, it is possible that some 

individuals and families would have difficulty purchasing suitable homes 

and that neighborhood conditions would suffer if HUD-owned properties 

were not rehabilitated or sold as quickly. However, unless significant 

changes are made to the program, it will likely continue to experience the 

problems raised in this report and by HUD’s Inspector General. 

Recommendations for 

Executive Action

GAO recommends that the Secretary of HUD take the following two 

actions: 

• Evaluate options to improve the program’s benefit to homebuyers, the 

agency’s monitoring of nonprofits, and enforcement of excess profits 

requirements.

• Assess the extent to which the program is meeting its objectives. 

If the Secretary determines that the current cost of the program plus the 

resources needed to improve it exceed the program’s benefits, GAO 

recommends that the program be terminated.
Page 28 GAO-04-208 Single-Family Housing

Agency Comments and 

Our Evaluation

We provided HUD with a draft of this report for review and comment. In a 

letter from the Assistant Secretary for Housing (see app. I), HUD agreed 

with our recommendations to further assess the program and said it would 

proceed accordingly. Also, HUD disagreed with some aspects of our 

methodology and said that our analysis overstated the program’s costs and 

understated its benefits. Lastly, HUD said that the report should 

acknowledge the significance of the multiple public policy objectives the 

program serves. However, HUD did not respond to our third 

recommendation concerning the possible termination of the program if, 

after further evaluation, HUD determines that the program’s current costs 

plus the resources needed to improve it exceed its benefits.

More specifically, HUD stated that any conclusions about program costs 

should be based on actual program performance rather than on 

“hypothetical extrapolations.” We designed our analysis to estimate the 

effect of the Discount Sales Program while holding constant the effect of 

other factors, such as neighborhood and property characteristics, that 

might also influence the ratio of the net revenue HUD receives from selling 

a property to the property’s appraised value. To implement this approach, 

we developed a statistical model using data from actual HUD property 

sales and compared (1) the net revenue our model estimated HUD would 

have received for each discounted property had the property been sold 

through the regular process with (2) the net revenue our model estimated 

HUD would have received by selling the property through the Discount 

Sales Program. Each estimated value contained an error term that captured 

the effects of omitted variables unavailable for the modeling process. As 

appendix II of our draft report explained, comparing two estimated values 

removed the influence of the omitted variables from our comparison, 

leaving the effect of the program on HUD’s net revenue. HUD said that its 

own preliminary comparison of net revenues from program and 

nonprogram property sales had shown that the loss in net revenue from the 

program was substantially less than our estimate indicated, and that our 

report significantly overstated the program’s cost. Because HUD did not 

provide us details of its analysis, we cannot determine why HUD’s results 

differed from ours. We continue to believe that isolating the effect of the 

program from other influences, rather than making comparisons that do 

not control for these factors, is the most appropriate way to estimate the 

impact of the Discount Sales Program on HUD’s net revenue.

HUD also said that our conclusion that most homebuyers did not benefit 

financially from the program rested on the assumption that individual 
Page 29 GAO-04-208 Single-Family Housing

homebuyers would have access to rehab financing on terms as favorable as 

nonprofits and would have the skills to oversee the construction. HUD 

disagreed with this assumption and said it believes that nonprofits have 

both the ability to obtain financing that is unavailable to average 

homebuyers and the capacity to oversee the rehab work at a cost that “may 

be less than that” charged by profit-motivated firms. As a result, HUD said 

that our report significantly understated the program’s benefit to 

homebuyers. Our draft report recognized the possibility that individual 

homebuyers might not be able to rehab a home as cheaply as a nonprofit. 

For this reason, we estimated the program’s financial benefits under two 

scenarios. The first assumed equal rehab costs for nonprofits and 

homebuyers; the second assumed that homebuyers would pay 25 percent 

more than a nonprofit for the same rehab work. Under both scenarios, our 

estimates indicated that most homebuyers did not benefit financially from 

the program. Our draft report also recognized that obtaining financing for 

rehab work and overseeing this work are obstacles for some homebuyers, 

and that these and other factors that are difficult to quantify may make the 

program either more or less beneficial from a homebuyer’s perspective. 

However, it is important to note that homebuyers financing properties 

purchased through the Discount Sales Program in effect pay financing 

costs for the rehab work because the cost of this work is included in the 

nonprofit’s selling price (i.e., the homebuyer’s purchase price) and 

therefore is reflected in the homebuyer’s mortgage costs. Furthermore, 

because more than half of the properties we reviewed received less than 

$15,000 in rehab work—including some that received none at all—it is 

unlikely that the oversight costs for these projects would be very 

substantial. 

Finally, HUD said that the Discount Sales Program serves several public 

policy purposes and was neither conceived as nor intended to be only a 

source of revenue for FHA. HUD stated that the program contributes in a 

“direct and positive manner” to the promotion of homeownership and the 

revitalization of neighborhoods and that our report should acknowledge 

the significance of these objectives. Our draft report did not indicate that 

the program was intended to be solely a source of revenue. In addition, our 

draft report recognized that the goals of the program include the expansion 

of affordable housing opportunities and neighborhood revitalization and 

included statements from HUD and nonprofit officials about how the 

program may help to improve neighborhood conditions. Furthermore, 

HUD’s comments do not recognize the potential of the agency’s regular 

sales process to help achieve the same goals. Nevertheless, we added 

language to the final report to reflect HUD’s views about the program’s 
Page 30 GAO-04-208 Single-Family Housing

potential benefits. As our report notes, HUD has not provided any analysis 

to support its assertion that the program is contributing to the stated policy 

objectives. Accordingly, we believe that HUD needs to undertake such an 

analysis before making decisions about the program’s future. 

We are sending copies of this report to the appropriate congressional 

committees, and it will be available at no charge on GAO’s Web site at 

http://www.gao.gov. If you or your staff have any questions about this 

report, please call me at (202) 512-8678. Key contributors to this report are 

listed in appendix IV.

Sincerely yours,

David G. Wood

Director, Financial Markets and

Community Investment
Page 31 GAO-04-208 Single-Family Housing

Appendix I

Objectives, Scope, and Methodology AAppenednxidexiIs

Our objectives were to assess (1) the cost of the Discount Sales Program to 

HUD, (2) the benefits of the program to homebuyers, and (3) HUD’s efforts 

to monitor participating nonprofits and enforce program requirements. Our 

work focused on the approximately 1,200 properties HUD sold through the 

program in calendar year 2002 and the monitoring and enforcement 

activities the four HOCs performed in connection with those properties. 

To determine the cost of the Discount Sales Program to HUD, we examined 

the program’s impact on HUD’s net revenue from property sales and the 

cost of administering the program. To determine the effect of the program 

on HUD’s net revenue, we performed a statistical analysis of data from 

HUD’s Single-Family Acquired Asset Management (SAMS) and the U.S. 

Census Bureau. This analysis allowed us to estimate how much less net 

revenue HUD received by selling properties through the program instead of 

its regular sales process, while controlling for other factors. Appendix II 

provides detailed information on our statistical model. Because HUD does 

not keep records that would identify the costs to administer the program, 

we asked HUD to estimate them. HUD developed its estimate by querying 

HOC and Office of Housing officials about the number of staff years they 

allotted to the program in calendar year 2002. HUD used this information 

and salary and benefit data to derive an approximate personnel cost for the 

program. HUD’s estimate of administrative costs did not include 

comparatively minor expenses, such as travel and mailing costs. We did not 

assess the reliability of HUD’s estimate.

To determine the benefits of the program to homebuyers, we examined the 

program’s potential financial benefits and the types of homeownership 

services and assistance provided by participating nonprofit organizations. 

To determine the extent to which homebuyers benefited financially from 

the program, we performed a statistical analysis using data from HUD’s 

SAMS, the Bureau of the Census, and the four HOCs. Our analysis was 

limited to 238 discounted properties that HUD sold between February 1 

and December 31, 2002,1

 that nonprofits resold to homebuyers that same 

year. These were the only properties for which the HOCs had the rehab and 

resale data necessary for our analysis. This analysis allowed us to compare 

what homebuyers actually paid for the discounted homes to our estimate of 

what they would have spent had they purchased the homes under HUD’s 

regular sales process and paid for the rehab work themselves. Our analysis 

1

We used this time frame because HUD made significant changes to the program that 

became effective on February 1, 2002.
Appendix I

Objectives, Scope, and Methodology

Page 32 GAO-04-208 Single-Family Housing

assumed that in the absence of the Discount Sales Program, a homebuyer 

would be able to purchase the same home and rehabilitate it to the same 

extent as the nonprofit. We also assumed that a homebuyer would inhabit 

the home during the rehabilitation and, therefore, would not incur housing 

expenses for two residences during that period. We performed the analysis 

twice using different assumptions about rehab costs each time. The first 

time we assumed that a homebuyer would incur the same rehab costs as a 

nonprofit; the second time we assumed that homebuyers would incur 25 

percent higher rehab costs than a nonprofit. Appendix II provides detailed 

information on our statistical model. In assessing the program’s financial 

benefits, we also reviewed HUD’s rules and instructions for both the 

Discount Sales Program and the agency’s regular sales process and 

interviewed officials from HUD’s Office of Housing. To determine the types 

of services and assistance provided by participating nonprofits, we visited 

6 nonprofits that were actively involved in the program and interviewed 

officials from these organizations. During our visits to the four HOCs, we 

reviewed the affordable housing plans for a judgmental sample of 17 

nonprofits and interviewed the nonprofit coordinator at each HOC. We did 

not evaluate the impact of the Discount Sales Program on neighborhood 

conditions. However, we discussed this issue with HUD and nonprofit 

officials and visited six properties that nonprofits had either rehabbed or 

were in the process of rehabbing.

To assess HUD’s efforts to monitor participating nonprofits, we reviewed 

HUD’s program guidance and instructions, SAMS data on the number of 

discounted properties each nonprofit purchased in calendar year 2002, 

nonprofits’ annual reports on these properties, and the results of the HOCs’ 

desk and on-site reviews. We analyzed SAMS data, nonprofits’ annual 

reports, and desk reviews to determine the extent to which (1) nonprofits 

submitted required monitoring information through their annual reports 

and (2) the HOCs’ monitoring efforts identified noncompliance with 

requirements governing the resale price of discounted properties and the 

income level of the homebuyers. From the desk review information, which 

was current as of July 2003, we also determined the estimated excess 

profits earned by the nonprofit organizations that submitted annual 

reports. For each HOC, we used SAMS data and on-site review logs to 

determine how many of the nonprofits that purchased discounted 

properties were subject to an on-site visit. We also examined the results of 

these reviews and discussed them with cognizant HOC officials to 

determine how they were conducted and the types of problems they 

uncovered. Finally, we interviewed HUD Office of Housing and HOC 

officials about factors that hampered their ability to monitor nonprofits.
Appendix I

Objectives, Scope, and Methodology

Page 33 GAO-04-208 Single-Family Housing

To assess HUD’s efforts to enforce program requirements, we reviewed the 

agency’s regulations and guidance to determine the major enforcement 

actions available to the HOCs. We interviewed officials from HUD’s Office 

of Housing, Office of General Counsel, and the four HOCs about their 

ability to take these actions. At each HOC, we collected information on 

how frequently and in what situations they used these enforcement tools. 

We also collected information on the amount of excess profits nonprofit 

organizations used to pay down homebuyers’ mortgages as of July 2003. 

Finally, we obtained data from each HOC showing the calendar year 2003 

discounted home purchases of nonprofits that sold properties for more 

than program limits the previous year.

We tested the data we obtained from HUD’s SAMS and the HOCs’ desk 

reviews for reasonableness and completeness and found them to be 

reliable for the purpose of our analyses. In addition, we reviewed existing 

information about data quality and controls supporting SAMS and 

discussed the data we analyzed with agency officials to ensure that we 

interpreted them correctly.

We conducted this review from December 2002 through November 2003. 

We performed our work in accordance with generally accepted government 

auditing standards. 
Page 34 GAO-04-208 Single-Family Housing

Appendix II

Statistical Models Used to Estimate Program 

Costs and Benefits ApendxiI

Two objectives of the study were to determine (1) the cost of the Discount 

Sales Program to HUD and (2) the benefits of the program to homebuyers. 

For the cost objective, the scope of the study included properties that HUD 

sold to nonprofit organizations in calendar year 2002. For the benefits 

objective, the scope included the properties that HUD sold to nonprofits 

between February 1 and December 31, 2002, that nonprofits rehabilitated 

and resold to homebuyers during the same year. The empirical analysis 

used to address these objectives was based upon two procedures. The first 

procedure was the estimation of a model for which the dependent variable 

is the fraction of the appraised value that HUD recovers for each property 

after taking the agency’s selling costs into account. Controlling for a 

number of factors discussed below, the difference between the estimated 

net revenue HUD would have received by selling the properties at a 

discount versus an estimate of what HUD have would received if the 

property had been sold under HUD’s regular sales process represented the 

cost of the Discount Sales Program to HUD. The second procedure was an 

estimate of the financial benefits a homeowner received from purchasing a 

rehabilitated Discounted Sales Program property from a nonprofit 

organization rather than purchasing the property through HUD’s regular 

sales process and paying for the rehab work personally.

This appendix is organized in the following manner. First, there is a brief 

discussion of the data. Second, there is an explanation of the specification 

of the two econometric models that differ only in their dependent 

variables, as mentioned above. Next, there is a discussion of the estimation 

results of the two models. Finally, these results are used to calculate 

estimates of the costs and benefits of the Discount Sales Program.

Data For our analysis, we obtained from HUD’s Single-Family Acquired Asset 

Management System (SAMS) computerized files for the 65,039 properties 

sold by the agency during calendar year 2002. Each record provided 

financial information, such as selling price, appraised value, and various 

transactions costs. Each record also contained information on the 

structural characteristics of the property, such as the number of bedrooms 

and bathrooms. To describe the impact of neighborhood characteristics, 

we obtained data at the census tract level on the percent of the population 

living within an urbanized area, median household income in 1999, and 

median real estate taxes. The source of these data was the Census 2000 

Summary File 3 prepared by the U.S. Census Bureau. 
Appendix II

Statistical Models Used to Estimate Program 

Costs and Benefits

Page 35 GAO-04-208 Single-Family Housing

A review of the data identified a number of outliers and missing values. 

These observations were replaced using the means from the overall data 

set minus these observations. In addition, 3,776 observations were lost 

during the merger of the Census data because of the inability to identify the 

census tract in which they were located. As a result, these observations 

were not included in our analysis. In order to make the properties more 

comparable, we also restricted the set of properties to only those 

properties in census tracts in which at least one discount sale was made. 

Finally, we excluded some observations with extreme values for the 

dependent variable in our first model, which resulted in 5,189 observations 

being used in the regression analysis.

Specification of the Models We developed two econometric models possessing the same set of 

explanatory variables. We used the first model to estimate the cost of the 

Discount Sales Program to HUD. In this model, the dependent variable is 

HUD’s net revenue from the sale of a property divided by the property’s 

appraised value. Net revenue equals HUD’s selling price minus property 

taxes paid by HUD, management and marketing contractor costs, financing 

and closing costs (including discounts) paid by HUD, the listing broker fee, 

and the cost of any HUD sales incentives. We used the second model to 

estimate the benefits of the program to homebuyers. In this model, the 

dependent variable is simply HUD’s selling price for a property divided by 

its appraised value. The explanatory variables used in both models are of 

four types: dummy variables identifying the homeownership center (HOC) 

that administered the sale; dummy variables describing a combination of 

HOC and discount level, for those properties sold through the Discount 

Sales Program; characteristics of the property; and characteristics of the 

neighborhood. We chose the final specification of the models to obtain a 

good fit while avoiding problems with multicollinearity. 

We chose the property and neighborhood characteristics based on a review 

of the specifications employed in hedonic housing models.1

 Such models 

treat the housing market as an integrated series of submarkets for various 

housing characteristics such as house size and neighborhood quality. A set 

of housing and neighborhood characteristics can serve to describe a 

1

See, for example, Ann D. Witte, Howard J. Sumka, and Homer Erekson, “An Estimation of a 

Structural Hedonic Price Model of the Housing Market: An Application of Rosen’s Theory of 

Implicit Markets,” Econometrica, Vol. 47 (September 1979): 1151-1173.
Appendix II

Statistical Models Used to Estimate Program 

Costs and Benefits

Page 36 GAO-04-208 Single-Family Housing

product like housing because individual housing units can be differentiated 

from one another in many ways. 

Selling price is the amount paid to HUD by either the nonprofit or the 

private individual purchasing the property. Property taxes are the annual 

property tax multiplied by the number of days the property was owned by 

HUD divided by 365. Management and marketing contractor costs 

encompass all fees and reimbursable costs HUD pays to these contractors. 

Financing and closing costs paid by HUD include any discount granted to a 

nonprofit organization. The selling fee is the commission that HUD paid to 

the selling broker. This fee is generally zero for properties sold to 

nonprofits. All HUD properties are placed with a listing broker, so this 

generates a listing broker fee. Incentives are cash back allowances that 

HUD periodically pays to homebuyers who close on an executed sales 

contract relatively quickly—for example, within 30 to 60 days. Appraised 

value is the amount at which the property was appraised before the sale.

The explanatory variables belong to one of four groups of variables: those 

identifying the HOC that administered the sale; those describing a 

combination of HOC and discount level, for those properties sold through 

the Discount Sales Program; those describing characteristics of the house; 

and those describing characteristics of the neighborhood. This 

specification allows the net revenue as a fraction of the appraised value for 

properties sold through the regular program to vary by HOC, and it allows 

the effect of the Discount Sales Program on HUD’s net revenue to vary by 

HOC and by discount level. We defined a set of HOC dummy variables that 

take on a value of 1 for all sales (discounted and not discounted) 

administered by that HOC, with Atlanta as the omitted category, and 0 

otherwise. We then defined a set of dummy variables that represented 

combinations of HOC and discount program level. For example, there is a 

dummy variable that takes on a value of 1 for all sales with a 10 percent 

discount made by the Atlanta HOC and 0 otherwise, etc. In this way, the 

coefficient on that variable represents the difference in the fraction of the 

appraised value obtained on property sales with a 10 percent discount and 

made by the Atlanta HOC, compared with the fraction obtained by the 

Atlanta HOC on sales made through the regular program. Similarly, the 

coefficient on the dummy variable that takes on a value of 1 for all sales 

with a discount level of 30 percent made by the Santa Ana HOC represents 

the difference in the fraction of the appraised value obtained on property 

sales made at a 30 percent discount and made by the Santa Ana HOC, 
Appendix II

Statistical Models Used to Estimate Program 

Costs and Benefits

Page 37 GAO-04-208 Single-Family Housing

compared with the fraction obtained by the Santa Ana HOC on sales made 

through the regular program.2

There are three variables that provide characteristics for each property. 

These variables measure the property’s number of bedrooms, bathrooms, 

and stories. Although the likely association between those variables and 

HUD’s net revenue from a property sale relative to the property’s appraised 

value is not clear-cut, we anticipated that there may be a positive 

association for the number of bedrooms and bathrooms. HUD’s costs 

associated with property management and sale include a fixed cost 

component not related to property value as well as a component that varies 

with selling price. Accordingly, if properties with more bedrooms and 

bathrooms tend to be valued more, increasing both their selling prices and 

appraised values, then HUD’s net revenue relative to the appraised value 

will be higher for higher-valued properties because HUD’s fixed costs will 

be lower relative to the appraised value. Because the relationship between 

number of stories and market value is less clear, we had no clear 

expectation for the sign of the coefficient for that variable. Because any 

effect of these variables on market value is likely to similarly affect both 

selling price and appraised value, for the equation with selling price divided 

by appraised value as the dependent variable we had no clear expectation 

of the signs of the coefficients of these variables. However, we included 

them to keep our equations consistent and because these variables may 

exhibit statistically significant effects if HUD is able to obtain more 

accurate appraisals for certain types of properties.

Finally, there are four variables for neighborhood characteristics: the 

percent of the population in the census tract living within an urbanized 

area, median household income in 1999, median real estate taxes, and 

whether the property is located in a revitalization area. As for the property 

characteristics, we anticipated that to the extent that these neighborhood 

characteristics are associated with higher (lower) property values, they 

would be positively (negatively) associated with HUD’s net revenue from a 

property sale relative to that property’s appraised value because for higher- 

(lower-) valued properties HUD’s fixed costs will be lower (higher) relative 

to appraised values. Accordingly, we anticipated positive coefficients in the 

equation for which the dependent variable is HUD’s net revenue relative to 

2

There were no discounted sales at the 15 percent level made by the Atlanta HOC, and as a 

result the dummy variable combining 15 percent discount with the Atlanta HOC is also 

omitted. 
Appendix II

Statistical Models Used to Estimate Program 

Costs and Benefits

Page 38 GAO-04-208 Single-Family Housing

appraised value for the percentage of the population living within an 

urbanized area, median income, and median real estate because all of these 

variables are likely to be positively associated with property value. In 

contrast, we anticipated a negative coefficient for location in a 

revitalization area because that variable may indicate lower property 

values that would raise the ratio of HUD’s fixed costs to a property’s 

appraised value and because HUD may also incur additional costs to 

maintain properties in those areas. Again, similar to the property 

characteristics, we had no clear expectations for the signs of the 

neighborhood characteristics in the equation in which the dependent 

variable is HUD’s selling price relative to the appraised value because any 

effect of these variables on property value is likely to similarly affect selling 

price and appraised value. But, for the reasons cited above, we included 

them in the equation.

Table 7 presents the variable names and descriptions, along with mean 

values of the explanatory variables. In a previous version of the model that 

we estimated using a data set representing all usable observations of HUD 

property sales, rather than the data set containing only sales made in 

census tracts in which discount sales were made, we included as variables 

the year in which the structure was built and the average age of homes in 

the census tract. These variables were significant at that time, but they 

became insignificant in the final model when we limited our data set, so we 

dropped them from the analysis. Although the rate of change in house 

prices is another variable that may have some predictive value, we did not 

include it in our models because information on the rate of house price 

change was not available at the census tract level. Also, according to HUD 

officials, the average time between the appraisal and the sale of a property 

is about 3 months, so in most cases we did not anticipate that there would 

be much price appreciation or depreciation resulting from market 

conditions. 
Appendix II

Statistical Models Used to Estimate Program 

Costs and Benefits

Page 39 GAO-04-208 Single-Family Housing

Table 7: Variable Names, Descriptions, and Mean Values

Source: GAO.

Estimation Results We estimated the two models using ordinary least squares due to its ease of 

calculation and interpretation. Table 8 presents the estimated coefficients, 

their standard errors, and the summary statistics. 

In general, both models were consistent with our expectations. In the 

model for net revenue relative to appraised value, the coefficients on the 

Discount Sales Program category showed the expected pattern. That is, for 

each HOC, coefficients became more negative at higher discount levels.

Variable name Variable description Mean value

HOC dummy variables

Santa Ana HOC 1 if property was sold with or without a discount by the Santa Ana HOC, else 0 0.4039

Denver HOC 1 if property was sold with or without a discount by the Denver HOC, else 0 0.1243

Philadelphia HOC 1 if property was sold with or without a discount by the Philadelphia HOC, else 0 0.2249

Discount Sales Program category dummy variables

Santa Ana, 10 1 if property sold at 10 percent discount level by the Santa Ana HOC, else 0 0.0412

Santa Ana, 15 1 if property sold at 15 percent discount level by the Santa Ana HOC, else 0 0.0019

Santa Ana, 30 1 if property sold at 30 percent discount level by the Santa Ana HOC, else 0 0.0250

Denver, 10 1 if property sold at 10 percent discount level by the Denver HOC, else 0 0.0191

Denver, 15 1 if property sold at 15 percent discount level by the Denver HOC, else 0 0.0120

Denver, 30 1 if property sold at 30 percent discount level by the Denver HOC, else 0 0.0041

Philadelphia, 10 1 if property sold at 10 percent discount level by the Philadelphia HOC, else 0 0.0397

Philadelphia, 15 1 if property sold at 15 percent discount level by the Philadelphia HOC, else 0 0.0058

Philadelphia, 30 1 if property sold at 30 percent discount level by the Philadelphia HOC, else 0 0.0224

Atlanta, 10 1 if property sold at 10 percent discount level by the Atlanta HOC, else 0 0.0399

Atlanta, 30 1 if property sold at 30 percent discount level by the Atlanta HOC, else 0 0.0150

Property characteristics

Bedrooms The number of bedrooms in the structure 3.1134

Bathrooms The number of bathrooms in the structure 1.8071

Stories The number of stories in the structure 1.3472

Neighborhood characteristics

Urban area Percent of population in the census tract living within an urbanized area 92.9976

Median income Median household income in census tract (1999) 38.6993

Median real estate taxes Median real estate taxes in census tract 1.2862

Revitalization area 1 if property is located in a HUD-designated revitalization area, else 0. 0.2631
Appendix II

Statistical Models Used to Estimate Program 

Costs and Benefits

Page 40 GAO-04-208 Single-Family Housing

In both models the coefficients for the characteristics for the property 

possessed the same sign. In general, a higher fraction of the appraised 

value was obtained from larger homes, as measured by more bedrooms and 

bathrooms, as well as homes with fewer floors. The fraction of the 

appraised value obtained by HUD tended to be higher for properties 

located in more urban areas and where median real estate taxes were 

higher. In the model for selling price relative to appraised value, the 

coefficient for median household income was negative and statistically 

significant at less than the 0.01 percent level. However, in the model for net 

revenue relative to appraised value, the coefficient on this variable was 

statistically insignificant. 

Table 8: Coefficients from Estimated Models

Explanatory variable name Net revenue relative to appraised value Selling price relative to appraised value

Intercept 0.7975 0.9085

(0.0139) (0.0136)

HOC dummy variables

Santa Ana HOC 0.0461 0.0231

(0.0056) (0.0054)

Denver HOC -0.0444 -0.0520

(0.0079) (0.0077)

Philadelphia HOC -0.0026 0.0174

(0.0074) (0.0072)

Discount Sales Program category dummy variables

Santa Ana, 10 -0.1448 -0.0874

(0.0100) (0.0098)

Santa Ana, 15 -0.1959 -0.1064

(0.0437) (0.0427)

Santa Ana, 30 -0.2726 -0.0506

(0.0131) (0.0128)

Denver, 10 -0.0622 -0.0088

(0.0152) (0.0149)

Denver, 15 -0.1147 -0.0385

(0.0186) (0.0182)

Denver, 30 -0.1744 0.0525

(0.0309) (0.0303)

Philadelphia, 10 -0.1053 -0.0785
Appendix II

Statistical Models Used to Estimate Program 

Costs and Benefits

Page 41 GAO-04-208 Single-Family Housing

Source: GAO.

Note: Standard errors are in parentheses.

Program Costs We used the estimated coefficients for the Discount Sales Program 

variables from the model for net revenue relative to appraised value to 

estimate the cost of the program to HUD. We made this estimate by 

comparing the (1) net revenue that our model predicted HUD would have 

received for each discounted property had it been sold through the regular 

sales process with (2) net revenue our model predicted HUD would have 

(0.0109) (0.0106)

Philadelphia, 15 -0.1267 -0.0903

(0.0258) (0.0252)

Philadelphia, 30 -0.2718 -0.0611

(0.0140) (0.0137)

Atlanta, 10 -0.0851 -0.0536

(0.0106) (0.0103)

Atlanta, 30 -0.2595 -0.0173

(0.167) (0.164)

Property characteristics

Bedrooms 0.0052 0.0063

(0.0022) (0.0022)

Bathrooms 0.0155 0.0083

(0.0034) (0.0033)

Stories -0.0280 -0.0081

(0.0054) (0.0053)

Neighborhood characteristics

Urban area 0.0007 0.0007

(0.00009) (0.0001)

Median income 0.0003 -0.0006

(0.0002) (0.0002)

Median real estate taxes 0.0177 0.0254

(0.0032) (0.0031)

Revitalization area -0.0244 -.0091

(0.0054) (0.0053)

Summary statistics

R2 0.28 0.09

Number of Observations 5,189 5,189

(Continued From Previous Page)

Explanatory variable name Net revenue relative to appraised value Selling price relative to appraised value
Appendix II

Statistical Models Used to Estimate Program 

Costs and Benefits

Page 42 GAO-04-208 Single-Family Housing

received by selling it through the Discount Sales Program. Even though we 

knew the actual amount HUD received by selling the property through the 

Discount Sales Program, we compared two estimated values in order to be 

consistent. Each estimated value contained an error term that captured the 

effects of omitted variables unavailable for the modeling process. By 

comparing two estimated values, we removed the influence of the omitted 

variables from our comparison, leaving the effect of the Discounted Sales 

Program. 

This analysis was conducted using 1,194 discounted properties that were 

sold during calendar year 2002. The values of the Discount Sales Program 

dummy variables reflect the estimate of the difference in the fraction of 

appraised value obtained by HUD for each combination of discount level 

and HOC. That is, for a given property’s program characteristics—discount 

level and HOC—these estimates represent the difference in value HUD 

obtains compared to the case in which that property had been sold through 

the regular program. Because we included HOC dummies to capture 

otherwise unmeasured factors that might vary by region, the program 

characteristic dummy variables describe incremental revenue differences 

associated with each discount level as compared to the level of 

nondiscount sales in each HOC. For example, if a property was sold by the 

Philadelphia HOC at a 15 percent discount, the estimated difference in the 

net revenue value would be about –13 percent of appraised value. The 

relevant coefficient in table 8 is –0.1267. Similarly, if a property was sold by 

the Santa Ana HOC at a 15 percent discount, the estimated difference in the 

net revenue value would be about 20 percent of appraised value. The 

relevant coefficient in table 8 is –0.1959. 

We also estimated a range of costs using confidence intervals around the 

estimates for the sales category dummy variables. We did this by 

multiplying each coefficient estimate by 1.645 times its associated standard 

error. We then added and subtracted this amount from the coefficient 

estimate to create a 90 percent confidence interval around each estimate. 

We then recalculated program costs assuming that the estimates associated 

with the lower and upper bounds of the confidence interval reflected the 

difference between the value HUD obtains through the Discount Sales 

Program as compared to the value obtained through the regular sales 

process.

Benefits to Homebuyers In the model for selling price relative to appraised value, the benefit to the 

homebuyer of purchasing a property from a nonprofit organization was 
Appendix II

Statistical Models Used to Estimate Program 

Costs and Benefits

Page 43 GAO-04-208 Single-Family Housing

taken to be the estimated price a homeowner would have paid to buy the 

house through HUD’s regular sales process, minus the estimated financing 

and closing costs that HUD would have paid in that situation, plus the 

rehabilitation costs, minus the actual sales price paid to the nonprofit. This 

analysis was conducted using 238 observations for discounted properties 

purchased by nonprofits between February 1 and December 31, 2002, and 

resold to homebuyers that same year. These were the only properties for 

which data on the nonprofits’ rehabilitation costs and the selling price to 

the final homeowners were available. We performed the analysis twice 

using different scenarios. In the first scenario, we assumed that the 

rehabilitation costs incurred by a homebuyer operating outside of the 

Discount Sales Program would be the same as the rehabilitation costs 

actually incurred by the nonprofit. In the second scenario, we assumed that 

a homebuyer’s rehabilitation costs would be 25 percent higher than those 

incurred by the nonprofit. Under both scenarios, we assumed that the 

financing and closing costs HUD would pay for under its regular sales 

process were equal to 3 percent of the estimated selling price.

Because these properties were originally bought from HUD by a nonprofit 

organization, we needed to estimate the prices homebuyers would have 

paid to purchase the properties directly from HUD through the regular 

sales process to calculate the difference in price paid by homeowners 

purchasing a property after it had been rehabilitated under the Discount 

Sales Program. In a manner parallel to our estimate of net revenue 

described earlier, we used the values of the estimated Discount Sales 

Program dummy variables from our second model to make this calculation.
Page 44 GAO-04-208 Single-Family Housing

Appendix III

Comments From the Department of Housing 

and Urban Development ApendxiI
Appendix III

Comments From the Department of Housing 

and Urban Development

Page 45 GAO-04-208 Single-Family Housing
Page 46 GAO-04-208 Single-Family Housing

Appendix IV

GAO Contacts and Staff Acknowledgments ApendxiIV

GAO Contacts David G. Wood, (202) 512-8678

Steven K. Westley, (202) 512-8678

Acknowledgments In addition to those named above, Kimberly Berry, Gwenetta Blackwell, 

Stephen Brown, Emily Chalmers, Rudy Chatlos, Jay Cherlow, David 

Dornisch, John McGrail, John Mingus, Mark Molino, David Pittman, Steve 

Ruszczyk, Stewart Seman, and Mark Stover made key contributions to this 

report.

(250116)
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